UPSC Prelims 2021 Question:

With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following?

1. Expansionary policies 
2. Fiscal stimulus 
3. Inflation-indexing wages 
4. Higher purchasing power 
5. Rising interest rates
   
   

Select the correct answer using the code given below.

Explanation:

• • Expansionary policy: It leads to more economic activity via cut in tax rates, low interest rates, more expenditure on projects etc.  which can lead to demand-pull inflation. It is intended to prevent or moderate economic downturns and recessions. It leads to an increase in demand for various goods and services. So, point 1 is correct.
  • Fiscal Stimulus: It means expansionary fiscal policy, which includes increased government consumption or lowering of taxes. Both will ultimately lead to increase in income and purchasing-power of the people, thereby driving up the demand leading to demand-pull inflation. So, point 2 is correct.
    
    

• Inflation-indexing wages: It means making adjustments to wages based on inflation in the economy. Here, the wages would be increased if the inflation in the economy rises. However, the rise in inflation rate would negate any effective wage increase. Thus, it will not lead to demand-pull inflation. So, point 3 is not correct.
  
  

• • Higher Purchasing Power: When people earn more they can spend more and it leads to more demands for goods and services. So, point 4 is correct.

• Rising interest rates: It results in contraction in borrowing & spending activity, thereby leading to contraction in inflation. So, point 5 is not correct.
  
  

Therefore, option (1) is the correct answer.

Subject: Economics | Public Finance